Unicom:Big miss-2015 will remain a tough year for Unicom

Unicom reported disappointing 4Q results with earning missingconsensus by 38%, falling 14.5%YoY. The disappointment was not oneoff,but from slower growth in its mobile business and VAT impact. Costsavings in interconnection and selling expense were not enough to offsetmobile revenue decline. FDD-LTE licensing and tower sharing willunlikely help improve its competitiveness in 2015. We lower earnings by11%/15% for 2015/16. Maintain SELL.

Slowing mobile growth

Unicom’s mobile service revenue declined 8.2%YoY to Rmb36bn in 4Q14,2.3% lower than expectation. The weak mobile revenue growth was likelydue to slow 4G uptake, losing high end users, falling data pricing, new usersmostly coming from mass market and VAT impact. Unicom added only 3.4mnew 3G/4G users in 4Q14 (vs 11m in 4Q13) even after it launched 4G in thetop 56 cities. The blended ARPU (2G/3G/4G) decline accelerated to14.7%YoY and ARPU fell to a historical low of Rmb40.

Disappointing earnings

EBITDA grew only 5.4%YoY and EBIT was down 20%YoY in 4Q14. Costsavings in interconnection and selling expenses was offset by weak revenuegrowth. CU is least aggressive in promoting 4G among the three telcos.

Earnings showed a large impact as it has very low net margin of 2-3%.

Unicom has been struggling to gain scale in 3G and its business has beenweakening since China Mobile launched 4G.

2015 will remain a tough year

Unicom has to raise spending to stay competitive. Company increases itscapex budget from Rmb80bn to Rmb100bn this year even after consideringthe potential benefit from the tower company. Unicom will continue tostruggle to grow users if it doesn’t increase marketing cost. FDD-LTE licensingand tower company will unlikely help improve its competitiveness much.

Maintain SELL

Mobile service revenue growth to slow further in 2015 due to underinvestmentin 4G network and constrained marketing spending by SASAC.

User growth could remain weak and mobile ARPU will likely continue todecline in 2015. We lower earnings by 11%/15% for 2015/16. Valuation isnot cheap at 15.7x 2016 PE with uncertain earning outlook.